EIA's Mixed Natural Gas Storage Data

The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies, as domestic consumption declined with increase in temperatures across most parts of the country. However, on the bullish side, the build was well short of the five-year average levels, thereby widening the deficit with the benchmark.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states rose by 43 billion cubic feet (Bcf) for the week ended Apr 26, 2013, higher than the guided range (of 28–32 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. (MHP). The increase – the third injection of 2013 – also exceeded last year’s build of 31 Bcf but was below the 5-year (2008–2012) average addition of 67 Bcf for the reported week.

Despite past week’s build, the current storage level – at 1.777 trillion cubic feet (Tcf) – is down 795 Bcf (30.9%) from the last year and is 118 Bcf (6.2%) below the benchmark five-year average.

Natural gas stocks hit an all-time high of 3.929 Tcf in early Nov last year, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

However, things have started to look up in recent times. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang has now gone, thereby driving commodity prices to $4.38 per MMBtu – the highest since Sep 2011.

This, in turn, is expected to buoy natural gas producers, particularly smaller players like Bill Barrett Corp. (BBG), Linn Energy LLC (LINE) and Forest Oil Corp. (FST). With the financial incentive to produce the commodity and the subsequent improvement in the companies’ ability to generate positive earnings surprises, they are likely to move higher from their current Zacks Rank #3 (Hold).